Consumer spending, economic activity fall

Less than a week before Americans go to the polls to select a president, the government reported Thursday that the economy contracted from July through September. In a stark indication of widening national distress, consumer spending dipped for the first time in 17 years.

Economists said the drop in economic activity – with the gross domestic product shrinking 0.3 percent annually – presages more bad news in the months ahead. The impacts of a now-global financial crisis are continuing to squeeze companies and impede investment, causing more layoffs and austerity, while prompting Congress to consider a fresh round of spending aimed at stimulating commerce.

“The economy has taken a turn for the worse, big time,” said Allen Sinai, chief global economist for Decision Economics. “Consumption literally caved in. It is a prelude to much worse news on the economy over the next couple of quarters.

“The fundamentals around the consumer are all negative, and there are no signs of any help anytime soon, from anywhere.”

With the economy the dominant issue in the presidential election, the latest batch of dismal data offered no comfort to Republican John McCain, who has been running behind Democrat Barack Obama in polls.

Economic downturns have proved unkind to the incumbent party in elections. Many analysts argue that the recession of 1990 and 1991 cost President George H.W. Bush a chance at re-election in 1992. President Carter, a Democrat, lost his 1980 re-election bid to Ronald Reagan after a particularly nasty recession earlier that year. In 1960, in the midst of a recession, John F. Kennedy, a Democrat, defeated Richard Nixon, who had been vice president in the Eisenhower administration.

Not since 1900, when William McKinley, a Republican, won re-election, has the incumbent party retained the White House in the midst of a recession or within a few months after one.

In a statement Thursday morning, the White House acknowledged the weakening of the economy, while pinning the blame on a series of unusual events and arguing that the $700 billion bailout of the financial system would soon deliver relief.

“Today's GDP report is weak, but it is not unexpected,” said White House spokeswoman Dana Perino. “A number of things contributed to the slowing economy in the third quarter – record high energy prices, housing and credit concerns, two major hurricanes and a prolonged Boeing strike. The president is taking forceful actions to return the economy to growth and job creation by early next year.”

Whoever captures the White House seems certain to inherit a challenging economic picture. The economy began slipping in the last three months of 2007, dipping at a 0.2 percent annual rate. Then it grew modestly for six months, aided by tax rebate checks, but has since succumbed anew to slowdown.

Consumer spending – which makes up more than 70 percent of U.S. economic activity – dipped at a 3.1 percent annual rate between July and September, after growing at a 1.2 percent annual rate in the previous three months.

That was the largest three-month drop since the second quarter of 1980, a contraction that was in some sense artificial: The Carter administration, seeking to suffocate inflation, limited bank borrowing. Putting that episode aside, this year's drop represents the sharpest decline in consumer spending since the end of 1974.

Economists saw in the data a testament to the degree to which many households are so strapped that the very culture of consumption has been altered.

After years of pulling winnings from soaring stock markets, borrowing against the appreciating value of homes and leaning on abundant credit cards, Americans are finding those arteries of finance sharply constricted.

“The American consumer is finally hitting a wall that simply hasn't been there for 17 years,” said Jared Bernstein, an economist at the labor-oriented Economic Policy Institute. “What you see here is just a confluence of negative events closing every avenue that consumers have tapped over the years. There's only a couple of ways that consumers can finance their spending. It's labor income or nonlabor income, and both are on the mat.”

The economy has shed 760,000 jobs since the beginning of the year, with layoffs accelerating in recent months. Many companies have cut the hours of workers on the payroll.

Housing prices have continued to plunge, removing home loans as a channel for finance.

Banks still reckoning with disastrous investments on real estate have cut credit even to people with relatively decent histories.

This month, consumer confidence, a broadly watched gauge of American sentiment in use since 1967, plunged to its lowest level ever.